Predictions for the IPO Market in 2012

By Lora Keleher , last updated January 4, 2012

When companies initially go public, investors have the opportunity to share in their financial success. The large and potentially lucrative initial public offering (IPO) market draws both first-time and experienced investors. By investing in IPOs, you can see a sizable return on your investment, but you can also lose large sums of cash. IPOs are some of the most speculative investments on the market: a stock valued at $15 could rise to $20 and drop to $2 within a span of hours. In 2011, IPOs, such as Groupon and Zanga fared worse than expected, while offerings such as LinkedIn and Michael Kors did predictably well. Companies that have filed initial IPO paperwork for 2012 include many social media companies, though offerings are anticipated to be smaller in scope and fewer in total.

Understanding IPOs

Imagine that you’ve launched a successful business, and need additional money, or capital to expand into a large corporate conglomerate, or you’re looking to increase your company’s cash flow. To raise capital, you might decide to sell portions of your businesses, known as shares, in the form of stock, to investors. The first stock sale is known as an initial public offering, or IPO. The future success of a business is largely tied to the success of an IPO; if the IPO succeeds, the business can expand, but if it does poorly, the company could be forced to buy back its shares, at a loss. Investors can earn substantial sums of money by investing in IPOs that become hits, but they can also lose big by investing in companies that turn out to be duds.

Smaller Offerings

Industry analysts predict that in 2012, companies will continue to scale back the size of their IPOs, offering up smaller portions of their total operations for sale to the public. Rather than offering up 50% of their companies, firms will likely limit their offering to less than 10%. In addition to smaller percentages of companies being offered up for sale, analysts predict that smaller companies will go public this year. In the recent past, the success of an IPO often depended on size and name recognition, but this year smaller companies with strong valuations are likely going to fare better in the market than larger companies with weaker financials.

Venture Capital

When an entrepreneur starts a new business, it often requires a large influx of cash to get started. Since traditional lenders, such as banks, are usually unwilling to invest in such risky businesses, entrepreneurs often raise funds by approaching venture capital firms. Industry analysts predict a reduction in available venture capital funding for startups in 2012, which may result in fewer companies going public, and increased odds that companies that do go public will be successful in the marketplace.

Companies

Facebook is one of the most talked about companies expected to go public in 2012. The social networking giant could leave you flush with cash, but it could also leave you regretting the decision to buy early. A number of other social networking and technology-oriented companies are predicted to go public, including Yelp, Living Social and Dropbox. In other industries, Ally Financial and the Carlyle Group are also expected to go public.

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